Adtalem Global Education Inc (ATGE) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Adtalem Global Education First Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Joan Walter. Thank you. Please go ahead.

Thank you, and good afternoon, everyone. With me today from Adtalem's leadership team are Lisa Wardell, President and Chief Executive Officer; and Patrick Unzicker, our Chief Financial Officer and Treasurer.

I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Adtalem Global Education that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied. These factors are discussed under Risk Factors and elsewhere in our quarterly reports and Form 10-K for fiscal 2017 filed with the SEC and available on our website at www.adtalem.com. Adtalem disclaims any obligation to update any forward-looking statements made during the call.

During today's call, we may refer to non-GAAP financial measures, which are intended to supplement, though not substitute, for our most directly comparable GAAP measures. Our press release, which contains the financial and other quantitative information to be discussed today as well as the reconciliation of non-GAAP to GAAP measures, is also available on our website.

Telephone and webcast replays of today's call are available until December 2. To access the replays, please refer to today's release for information.

And with that, I'll turn the call over to Lisa Wardell.

Thanks, Joan. Good afternoon, everyone, and thank you for joining us on today's call.

As you can probably tell from my voice, Q1 is over and fall has arrived. During the first quarter, we faced some extraordinary challenges at Adtalem as we confronted the impact of 2 back-to-back Category 5 hurricanes at our medical schools in the Caribbean. I could not be more proud of the strength of our entire organization, the perseverance of our leaders and the determination of our students and colleagues, which were all quite evident in the weeks that followed these devastating events. These disasters demonstrated our resiliency and allowed us to pressure test both our crisis response plans and our business continuity abilities. We evacuated both the AUC and RUSM communities of students, faculties and colleagues, with everyone safe and accounted for in the weeks that followed. In addition, we were able to continue the September semester for both of our medical schools, a testament to 2 institutions and our home office team, who worked cross-functionally and tirelessly for the good of our medical students and the entire Adtalem portfolio.

While I'm proud of our team for driving our transitional efforts, it goes without saying that our hearts go out to those communities throughout the Caribbean and the United States who suffered major damage and the loss of community members, and who clearly face a long road to recovery. We're continuing to assess the damage to our infrastructure and manage the expenses associated with the evacuations and temporary relocations of the medical schools.

Just as I applaud the team's crisis response, I'm equally grateful for the rest of our organization, which has continued to focus on our priorities and the execution of our operating plan. I'm pleased to report that our first quarter results were ahead of our plan, excluding the impact of the hurricanes.

We continue to benefit from the cumulative effects of the expense reductions we've taken during the past year, which have led to increased operating leverage. As the global higher education industry continues to experience increased demand and a shift in education delivery modalities, we're strategically adapting to the environment and expanding our presence in our core verticals: Medical and Healthcare, Professional Education and Technology and Business.

Our portfolio remains focused on evaluating the value -- on elevating the value proposition we deliver to each of our student segments by communicating to students in a way that resonates with their needs and lifestyles while further strengthening our in-demand program offerings in our 3 core verticals. We're also managing a more disciplined product life cycle and strategically expanding our offerings as we gain a better understanding of what employers need to acquire, develop and retain talent. All of these initiatives are aimed at addressing the significant workforce skill gaps that are prevalent in our society globally.

I'm also pleased to report that Adtalem's student commitments, which we announced 1 year ago, recently underwent an independent third-party review and have now been fully implemented. These commitments reflect our resolve to take a leadership role in improving transparency and accountability in higher education based on past standard higher education policies, including reduced independence on federal financial aid and greater transparency for students regarding borrowing practices and academic program outcomes. Among other accomplishments, the review confirmed that Adtalem's institutions were all under the 85% voluntary federal funding threshold goal we established last year, including Department of Veterans Affairs and military tuition assistance benefits. I'm very proud of my colleagues from across our organization who worked together to deliver these unique commitments to our students. Building on our already strong foundation of policies and practices, we were determined to set new standards to help students achieve their education and career goals.

We're generating healthy cash flows and we're maintaining a strong balance sheet. And we'll continue to strategically manage our capital allocation, delivering returns to our owners through increase share repurchase activity and investments in academic quality and growth initiatives. The Medical and Healthcare segment remains a substantial vertical for Adtalem given the breadth of our institutions, our strong brand and the attractive long-term global growth opportunities. Our Medical and Healthcare institutions represent a little more than 75% of our operating income.

Chamberlain is well positioned to pursue the supply/demand imbalance in nursing and other health care professions and to address the needs of our aging population and the increasing demand for skilled health care professionals. We're focused on leveraging Chamberlain's reputation, resources and university establishment to diversify the school's offerings and pursue additional growth channels.

Our Masters of Public Health program is performing ahead of plan, and we're broadening our programs to fully capitalize on this sector opportunity. We're all very excited about the recent publication of a book written by Chamberlain University President, Susan Groenwald, entitled Designing & Creating a Culture of Care for Students and Faculty: The Chamberlain University College of Nursing Model. The book describes Chamberlain Care, the unique organizational culture and work climate developed at Chamberlain University and to a great extent, adopted across the Adtalem portfolio. It serves as a guide for any organization seeking to make cultural and structural changes to improve student or employee satisfaction, engagement and achievement. We believe it will strengthen Chamberlain's brand and add to the very strong reputation of the institution.

At our medical and veterinary schools, we're pleased to report that, before the hurricane, new student enrollment was tracking to show growth in the low double digits for the September class, reflective of the changes we've made in marketing and admissions over the past month. We're also pleased to see recent increases in the average GPAs for the incoming students at both of our medical schools, with averages in the 3.2 range. We're consistently attracting talented and hard-working students who are committed to becoming successful MDs.

Students from AUC are continuing their studies in the United Kingdom. While about 6% decided to take a break for the semester, 94% of students resumed class on September 29 at the campus of University of Central Lancashire. In January, we are planning to hold classes for first, second and third semester students at AUC and St. Maarten, pending the results of our ongoing analysis to determine whether our campus and the St. Maarten infrastructure are ready for students' return. Fourth and fifth semester students will remain in the U.K., where they will take advantage of an expanded number of clinical partners. We are grateful to have UCLAN, which is providing our students and faculty with quality lab and classroom facilities, as our partner.

Our Ross campus on Dominica as well as the infrastructure of the entire island experienced significant damage, which will take time to address. To ensure continuity of our programs, in mid-October, we moved Ross students to temporary classrooms on a cruise ship, which is docked at St. Kitts and Nevis. We appreciate the government of St. Kitts for facilitating our ability to dock at the St. Kitts port in close proximity to our Ross University School of Veterinary Medicine. Approximately 78% of Ross students have stayed with us for the September semester, attesting to their determination to pursue their career goal of becoming a medical doctor as well as the quality of the education we provide and our disaster response, which provided the continuity they needed to get back on track for the semester. About 2/3 of those students who took a break this semester have indicated their intent to return in January of 2018. Patrick will provide more detail on the financial and enrollment impact of the hurricanes in a moment.

Our Professional Education segment delivered healthy growth in revenue and operating cash flow during the quarter. Becker remains a solid business with an attractive long-term growth profile, given its leadership in CPA test preparation as well as its focus on growing its continuing professional education program. Becker's excellence in education is demonstrated by the fact that 90% of Elijah Watts Sells Award recipients in 2016 prepared with Becker's CPA Exam Review course. This is an outstanding achievement when you consider that more than 100,000 candidates sat for the exam. In total, since its founding, Becker has helped more than 1 million candidates pass the CPA exam, attesting to the quality and effectiveness of the organization's program and teaching methods.

Mehul Patel, our new Professional Education vertical leader, is focused on leveraging Becker's reputation and large alumni base to expand our presence and gain share in the continuing professional education arena. The market for CPE-related courses is estimated to be $700 million in addressable opportunity in the U.S. alone, where we currently have only a 1% share. We have a right to win in this market and see considerable upside over the long term as we strategically leverage Becker's reputation and diversify our payer mix. In fact, Becker recently signed a continuing education contract with one of the top accounting firms, the largest such deal ever signed by Becker for continuing education courses.

ACAMS, which we have owned since July of 2016, is a leader in serving the very underpenetrated global market for accounting fraud prevention, which is estimated to be between $2 billion to $3 billion market globally. As an asset-light member organization, the business provides attractive margin growth potential through 3 core revenue streams: membership, certification and conferences. For perspective, ACAMS now has approximately 56,000 registered members, representing a 40% year-over-year increase. And the recent ACAMS conference in Las Vegas attracted over 2,500 attendees, up 8% year-over-year, with participation from sponsors and exhibitors increasing 10%. Post-conference survey feedback from attendees was exceptional. We expect ACAMS to deliver at least 20% on a compounded basis for the next 5 years, implying about a $100 million business by 2021. In addition, we continue to build international momentum for the core ACAMS products, which represent significant upside to the current model.

In our Technology and Business segment, Adtalem Brazil continues to represent a solid growth opportunity with high academic standards and strong national rankings, educating more than 110,000 students through 14 institutions. We're committed to strategically launching new programs aimed at addressing supply/demand imbalances across the country as well as pursuing distance-learning opportunities. This past summer, the Brazilian government changed regulations on opening and operating distance-learning businesses across the country. The approval process for launching these facilities was streamlined, making this segment more economically attractive to larger institutions. This is a very large market opportunity. Adtalem Brazil will begin offering a group of bachelors and associate degree programs via distance learning in February. These programs will be offered under the Unifavip brand and will be launched through the Damásio network of 220 learning centers, which has the infrastructure and staff in place to support distance learning degrees.

Our leadership in Brazil continues to deliver improving profitability and solid cash flows despite ongoing macroeconomic challenges. As the Brazilian economy shows improvement, we are well positioned to further expand margins given the operating leverage in our model.

In our U.S. Traditional Postsecondary segment, we're continuing to roll out the Tech Path programs at DeVry University through new, shorter, stackable programs and a streamlined marketing organization. Our DeVryWORKS initiative has been an increasingly larger contributor to DVU's stabilization. The program has gone from 3% to 4% of new enrollments 1 year ago to about 14% of new enrollments today.

We continue to manage our expenses and move to further decrease our real estate footprint. We are in the process of consolidating an additional 8 campuses, which will reduce our footprint to 51 campuses.

At Carrington, we're beginning to see the benefits of the institution's revived marketing initiatives. It's been about 6 months since Carrington repositioned its marketing strategy, and we've seen a steady increase in the number of inquiries. We are starting to see positive signs that give us confidence that new student enrollment will begin to stabilize in the second quarter of this fiscal year.

In terms of curriculum, we're continuing to focus on adding shorter, stackable, quality programs. Our phlebotomy program had a successful launch in Reno in August. The program is 12 weeks in length, has a relatively low tuition rate and is Non-Title IV, so it's very much in line with our payer diversification strategy. We're adding continuing education programs such as courses that support dental assistants and hygienists as well as an IV certification course. This allows for additional Non-Title IV revenue and aligns our programs with the needs of health care organizations and workforce partners.

Now let me turn the call over to Patrick for the financial review.

Thank you, Lisa, and good afternoon, everyone. We're continuing to make progress in executing our strategic plan, and our Q1 results, excluding the impact of the hurricanes, were ahead of our expectations.

We've achieved a notable cultural shift across our organization through our transition to a portfolio management approach. We're driving stronger cost discipline, increasing operating accountability and measurement across our organization as well as a heightened emphasis on increasing our operating profitability and return on invested capital. We're also seeing tangible signs of improvement in select areas of our portfolio beyond cost efficiencies. Overall, we remain very optimistic about our long-term outlook, given our exposure to growing, in-demand sectors and our ability to execute our strategy in a highly efficient manner and deliver enhanced cash flows to the benefit of our owners.

With regard to the financial impact of the hurricanes, revenue was reduced by approximately $7 million during the quarter. We expect to realize most of the lost revenue in the fiscal year, as both AUC and Ross Med have resumed their respective September basic sciences academic instruction. We incurred approximately $14 million of incremental cost and expenses net of expected insurance recoveries during the quarter. Operating income was lower by approximately $21 million from reduced revenue and additional costs incurred because of the hurricanes.

Now we expect to incur additional expenses in the second and third quarters relating to maintaining alternative teaching sites for both AUC and Ross and remediating the property damage to the campuses in St. Maarten and Dominica. We expect incremental costs to be reimbursed under our insurance policies, having already met our deductibles during the first quarter.

Turning to the first quarter. Total Adtalem revenue of $421 million was down 6.4% from the prior year. The growth at Chamberlain, Adtalem Brazil and our Professional Education segment was offset by declines at DeVry University and Carrington and the impact of the hurricanes at our medical schools. Excluding the impact of the hurricanes, revenue would have declined by 4.8%.

Total costs excluding special items for the first quarter were $399 million, decreasing 3.2% from last year. Excluding the impact of the hurricanes, total cost excluding special items would have declined 6.5%.

During the quarter, we again reduced costs at our home office, with overhead spending decreasing 10.4% year-over-year, excluding special items. Through our continued focus on improving our operating effectiveness, we also reduced costs at Chamberlain and Becker. Total pretax special items in the first quarter amounted to $8 million from restructuring at DeVry University and our home office.

Operating income for the first quarter decreased 41.2% to $22.4 million excluding special items as compared to last year. Now excluding the impact of the hurricanes, operating income would have increased nearly 14%. Net income excluding special items was $18.9 million during the first quarter, which resulted in earnings per share excluding special items of $0.30.

Our effective tax rate excluding special items was 15.7% for the first quarter compared to 22.5% in the year-ago quarter.

Now let's review our segment performance. Starting with Medical and Healthcare, revenue of $191.3 million was down 4.2% in the first quarter. Segment operating income decreased by 40.2% over the prior year to $26.2 million.

Chamberlain revenue grew 2.2% for the quarter. In September, new student enrollment declined 0.8%, and total students grew nicely at 4.5%. Solid new enrollment growth in our post-licensure programs driven by continued market demand for our MSN family nurse practitioner specialty track was offset by a decline in our BSN prelicensure programs, as we continued to refine our admissions processes. For the full year ahead, we expect mid-single new student enrollment growth at Chamberlain.

Revenue at our medical and veterinary schools decreased 12.4% during the first quarter, primarily due to the impact of the hurricanes. In September, new student enrollment increased 0.7%, and total students decreased 6.9% as a result of students taking a break in the semester -- in the September semester as a result of the hurricanes. We expect medical and veterinary enrollments to grow in the January semester as we work to get back to historical enrollment levels.

Turning to our Professional Education segment. Revenue increased 15.3% to $40 million in the quarter, driven by the growth of ACAMS, which exceeded our expectations. This segment's operating income increased by 73.5% to $10.5 million during the quarter as a result of the revenue growth at ACAMS.

In our Technology and Business segment, revenue of $62.4 million increased 7.2% in the quarter, primarily driven by increased student persistence and favorable currency rates. Without this currency effect, revenue would have still grown by 4.3% in the first quarter. The segment's operating income was $1.9 million in the quarter compared to a loss of $2 million in the prior year.

And finally, in our U.S. Traditional Postsecondary segment, revenue of $127.9 million was down 19% in the quarter as a result of declining enrollments at DeVry University and Carrington. Segment operating loss excluding special items was $13.3 million in the quarter compared to a loss of $6.9 million in the prior year. Revenue at DeVry University declined 20.8% to $95.7 million during the quarter, driven by continued enrollment declines. In September, undergraduate new student enrollments decreased 17.7%, while total students declined 21.4%. In the first quarter, excluding special items, we recovered 89% of expenses for every dollar of lost revenue at DeVry University, for a total reduction of costs of $22.3 million. We are making adjustments to our DeVry University marketing model, which is expected to result in lowering our cost per new student. Also, we have further plans to reduce the size of several of our locations as we rationalize our cost structure to improve operating income and cash flow.

Carrington revenue declined 13.1% during the quarter. New students declined 7.8%, and total students declined by 20.8%.

Turning to our outlook. For the second quarter of fiscal 2018, we expect total Adtalem revenue to be down 4% to 5% year-over-year. Revenue growth within the Medical and Healthcare segment, along with growth in the Professional Education and Technology and Business segments, is expected to be offset by planned revenue declines in the U.S. Traditional Postsecondary segment. Second quarter fiscal 2018 operating costs before special items are expected to decline 1% to 2% versus the prior year as a result of cost reductions at DeVry University, Carrington and our home office. Second quarter expenses will be impacted by the timing of the receipt of insurance proceeds for the reimbursement of hurricane-related expenses.

We expect to incur additional restructuring charges as we continue to rightsize operations to better align with our enrollment levels. For the full 2018 fiscal year, revenue is expected to decline 2% to 3% compared to the prior year, and earnings before special items are expected to grow in the low single-digit range as compared to the prior year.

As previously noted, given the evolution of our portfolio and the sizable seasonal contributions from Becker and Adtalem Brazil in our third and fourth quarters, our earnings performance will be weighted to the second half of the year. Our effective income tax rate excluding special items was 15.7% for the quarter. The tax rate was favorably impacted by a shift in earnings to lower-tax jurisdictions and a tax benefit related to stock-based compensation and a tax benefit to reflect a change in the state tax rate. In fiscal year 2018, we expect our effective income tax rate from operations to be within the 19% to 20% range before special items.

Now turning to our balance sheet and financial position. Cash flow from operations for the first quarter was $90 million. Our cash and cash equivalents were $274 million at September 30, 2017, while outstanding bank borrowings were $135 million, leaving us with a great opportunity with respect to our balance sheet. Our net accounts receivable was $190 million, an increase of 3% from the prior year. We closed the quarter with bad debt as a percentage of revenue at 2.5% compared to 2.3% in fiscal 2017.

Capital spending for the quarter was $14 million compared to $11 million in the prior year. We're targeting capital spending for fiscal year 2018 to be in the $60 million to $65 million range excluding the hurricane spending, primarily driven by investments within our Medical and Healthcare and Technology and Business segments for new campuses at Chamberlain and to enhance academic quality.

During the quarter, we returned $50 million to our owners through repurchasing approximately 1,478,000 shares at an average purchase price of $34.08. Our first quarter share repurchase program exceeded our share repurchase activity for all of fiscal year 2017. The significant increase in the pace of our repurchases under the program is supported by our confidence in our strategic plan and our continued belief that the intrinsic value of Adtalem shares is meaningfully higher than our current market valuation.

Now let me turn the call back over to Lisa.

Thanks, Patrick. Our organization showed tremendous resiliency during the quarter as we moved rapidly to confront the extraordinary challenges from the hurricanes and ensured our students continued their education. We're seeing the benefits of our diversified portfolio of schools and attractive range of in-demand programs, as several of our institutions were able to drive improved results during the quarter. Overall, we're following a solid strategic road map to execute on our 4 strategic priorities and build on the successes we achieved in the past year.

Student outcomes remain a priority, and we are united in achieving our mission, which is fully aligned with delivering better financial performance. We believe our ability to address the unmet workforce skills gap in our verticals, while continuing to improve the underlying economics of how we operate, will lead to enhanced value for our fellow owners.

Thanks, Lisa. I'd now like to ask the operator to open the call for a question-and-answer session.

(Operator Instructions) Our first question comes from Peter Appert of Piper Jaffray.

Lisa, I was hoping you could give us some more color on the dynamics around nursing enrollments, specifically what you're doing that's impacting the BSN program. What gives you confidence in the ability to get to mid-single-digit growth for the year?

So I'll start off here, Peter, as Lisa is recovering from (inaudible). We've made some leadership changes coming into the -- earlier in the quarter as it relates to Chamberlain, and it was a big focus on some process improvement for the campus-based enrollments. From our perspective, this is not a top of the line or a top of the funnel problem. It is execution. And as we move now to the next start for January and as we look at our application flow and where we are, we're increasingly confident that we'll have nice growth for the BSN program in January.

And any specifics then, Pat, in terms of -- I think Lisa had mentioned changes in admissions requirements or standards or something. Could you just expand on that?

Sure. So we had made some changes to our admissions matrix and requirements, and we're starting to come up on the 1-year anniversary of that. Those changes were made to ensure that we've got successful student outcomes and results on the back end of the process. So we're going to start to get a benefit of anniversary-ing that as well.

Okay. And then Pat, can you talk about the RN to BSN and what the trends are there in terms of enrollments for starters?

Sure, yes. Enrollments, they have slowed a bit. But as we look at the September session, enrollments still grew in the 1% to 2% range. And we did get very nice growth in the post-licensure programs overall, largely driven by the MSN, with the RN to BSN contributing to that as well. But we just quite weren't there yet with where we wanted to be with the BSN campus starts. But again, as we move into this January session, we're becoming increasingly optimistic to returning that to sustainable growth.

Yes. I'll just add, we did have some hurricane impact in Texas and Florida for the RN to BSN, so we're confident moving into the new calendar year.

Got it. And I'll direct all my questions to Pat. The DVU numbers continue to look like challenging, frankly, in terms of the enrollments. I hear what you're saying in terms of the repositioning, et cetera, but it's hard to see from our seats that you're seeing any improvement in terms of the traction in that business. Where are you in the process of thinking about strategic options for DVU?

Yes. So I would start by saying, look, we don't -- I don't believe in miracles other than what happened in the wake of the hurricanes to getting folks off those islands. But beyond that, look, there's no silver bullet for DVU. You guys know that. You've got the facts that we have, and we're being transparent with that. That's why we continue to manage the costs. That's why we made management changes and significant -- or bold moves as it relates to our marketing spend, reallocation to digital as well as some of the programming that we've talked about for some times. But I want to be really clear that we hold ourselves accountable to this portfolio management lens that we've been talking about now for several quarters. And we are seeing what you're seeing. And while we do see the positive, particularly as it relates to DeVryWORKS, that percentage of our new student enrollment going up 3% to 4% to close to 15% of our new student enrollments. We recognize that it's been slow going here. And as a result, we have consistently said that we look at this quarter-to-quarter. This is not something that we take lightly as it reflects on the portfolio. So we understand the sense of urgency there.

Understood. And then can you give me any color on the flow of applications within the MD programs post-hurricane? Has there been some significant impact? I'm wondering how it impacts, potentially, the admissions outlook for next fall, for example?

Yes. So it is -- well, first of all, I would start with sort of January, May. I think it's a little early for the fall, but we have not seen a significant negative impact at all. In fact, 1 of the 2 schools is ahead of plan in terms of increase in admission. So we're -- it's both right in line of where they would be for January and going into May. So we are obviously solving for that, making sure that -- obviously, part of that is where classes are going to be located, et cetera. AUC is a little ahead of Ross Med, so they've been able to announce where that January semester is going to be. The first and second semesters will be going back to St. Maarten, the first, second, third. And then fourth and fifth will remain in the U.K., And we've seen no negative results in that.

Got it. And then last thing. Pat, the pace of buyback activity picked up, obviously, which is great, in the first quarter. And I'm wondering what we should think about for the balance of the year.

Sure. So we let the -- our belief and confidence in the plan drive that. That informs our intrinsic value of where we feel that we should be trading as we demonstrate that we can fully execute on our plan and return our institutions to sustainable growth. And we see a gap of where the market values us today versus where we think we should be, and we're understanding of what it takes to close that gap. And so based on the current valuations, if we're to continue to trade where we are today, we would continue to expect a consistent level of share repurchase activity.

Consistent at the level of the first quarter, you're suggesting?

Yes.

Our next question comes from Jeff Silber of BMO Capital Markets.

Let me say my kudos on you guys getting back up to speed so quickly in the Caribbean. It really is amazing. I just had a couple questions about that and maybe just more mechanical from an accounting perspective. For students that decided not to continue their education, did you recognize any revenues either in the third quarter or the current quarter -- excuse me, the fiscal first quarter or the current quarter?

So at American University of the Caribbean, based on the timing of the hurricane and when it hit relative to the timing of the September semester, there was, in fact, no revenue recognized at all for the basic sciences portion, of course, which represents about half of their revenue. For Ross Med, there was about 15 days of classes were taught in September. And again, we have a provision for refunds, anticipating those folks who would withdraw based on our refund policy and pro rata. So that would be -- is factored into the revenue that we recognized in the first quarter -- or the quarter ended 9/30.

Okay. And in the current quarter, again, if their students did decide not to continue, do you get to recognize that revenue?

No. So if those students -- and again, a very small portion -- as we said, about 6% are sitting out at AUC, with a significant majority of those we expect to return in January. And then similarly, Ross, a significant majority of those students would return in January. So then as those students would reenroll, we would recognize revenue as we start to deliver instruction to those students in the January semester.

Okay, great. I appreciate you clarifying that. And then on the $20 million in lost income that you cited in the fiscal first quarter, you mentioned that you should be able to recoup that, net of the deductible. How will that be recorded when those monies come in?

Sure. So if you just break down the $21 million impact of the hurricanes in the first quarter, about $7 million of that was on the top line. So we would then see that revenue shift into the balance of the year, with a majority of that being picked up in the second and third quarters as those students return -- or those classes that were darked resumed in the quarter ended 12/31 and going forward. And then for the expenses, in total, we incurred about $25 million of incremental expenses in Q1. And a little more than half of that was related to the evacuation and care of our students and faculty. And then a little less than half, of course, was related to the write-down of assets for what we've identified that has been damaged. So of that $25 million, I kind of think about it this way. We've got a deductible of about $13.5 million in total, which we fully now satisfied in the first quarter. So you get a net impact of about $13.5 million, the $7 million lost on revenue, that gets you to the $21 million shortfall on operating income. And if you were to apply a tax rate to it, that's worth about $0.26 a share.

Okay. Well, you anticipated this question. I appreciate it, Pat, you going through that. And again, in terms of the timing, do you know when those proceeds will be received?

So the timing, we did record a receivable of about $11 million against the total $24 million expenses in write-off. And that cash will hit -- a significant majority of that cash should hit based on our submissions of proof of loss in this current quarter. And then as we incur expenses on business continuity, et cetera, those are reviewed and reimbursed. So that's what we've said why our expense is down 1% to 2%. Some of that is being impacted by what we see as a delay in the timing of when we incur the expense, and then the subsequent cash proceeds most likely in the third quarter. But it'll be somewhat of an ongoing fluid process until we finalize the claims.

All right. I understand that. And again, are we just talking about the business interruption insurance proceeds? Or are we talking about any type of physical damage in terms of the recovery?

This would be both.

This would be both. So it's all inclusive in there? Okay. I really appreciate that. If we can shift gears, you mentioned that you're going to be making some changes to the marketing model at DeVry University. Can we just get a little bit of color on that?

Yes. So it is similar to what we were talking about before as we think about the way that our students receive or want to receive information, and it's far more of a digital media paid search kind of referral model. We've seen that work far better with some of our institutions -- other institutions, Chamberlain as an example. And then also on top of that, really thinking about our marketing and just sort of allocating the spend to more program-specific marketing versus the overall DeVry University brand. So a lot of our marketing has been focused on DeVry University when, in fact, as you really peel back the social media and paid search onion, if you will, it really needs to be focused on those programs, a lot of which we've talked about over the last couple of calls in terms of program stacks and specific to Tech Path and technology and the more -- the certificate programs, et cetera.

Our next question comes from Jeff Meuler of Baird.

Just, I guess, first, could you help me out with the Q2 guidance commentary? What does it mean that second quarter expenses will be impacted by the timing of the receipt of insurance proceeds? Like, what could be impacted on the Q2 guidance? Can you quantify that?

Yes. The impact there is we're anticipating that we'll incur expenses in the second quarter, which we will receive the reimbursement for most likely in the third quarter. So that would, obviously, mask some of the underlying expense savings. Or said otherwise, without the hurricane, we should -- would have expected a little bit better expense performance.

Okay, that's helpful. And then just on the comments about the Medical and Healthcare starts trends and then the hurricane impact. Just given that when the hurricanes fell in the month and relative to when, I guess, the academic start date would have been, can you just help me understand what was going on there? I think it was -- were tracking to double-digit growth, but I thought the hurricanes hit after the campus start date?

Yes. So the hurricanes hit literally right as AUC was starting. So AUC was not able to deliver any of the basic sciences in its curriculum during the month of September -- or not until right at the end of the month. So those students -- where we were, and if that census would have held without those students, those who chose not then to -- for those -- said another way, for those students who chose either to withdraw or sit a semester out and return in January, based on the preliminary census for both Ross and AUC, we would have been up in the low teen percentage versus being up just almost 1%, accounting for those students who withdraw or said, "We need to take a little bit of time off" just given what they went through and will rejoin us in January.

Okay. And then on the commentary about Chamberlain admissions requirements, is this to address the, I guess, the NCLEX passage rate, which I think the delta between you and the national average has been widening out? And what else are you doing to address NCLEX passing rates?

So there's a number of things that we're doing as it relates to enhancements to our curriculum, partnering with ATI, which we had a press release -- or Chamberlain had a press release that's pretty descriptive of how we want to continue to support or enhance our support for our students there. And then we just want to ensure that from our admissions matrix and process, that we've got students who we feel very confident will graduate and score well in the NCLEX. So it's a confluence of those items.

Do you have a -- can you help quantify how many students are being -- are failing to meet the current criteria that would have met the criteria prior to changing the grid?

We don't necessarily look at it that way. We see opportunities that -- with our enhanced admissions matrix and our improved admissions processes based on the good inquiry flow that we have and the big supply/demand imbalance for nurses, we're very confident that we'll return to growth in January.

Okay. And then you guys have this great multiyear track record of offsetting revenue declines at DVU. And then I just want to see if this is just kind of a 1-quarter fluke, but the capture rate declined and the loss, I guess, widened year-over-year. So just how much opportunity do you have to continue to take expense out if revenue is going to continue to decline at DVU?

Yes, great question. We -- the rate of expense recovery for DVU will increase rather as we move forward now into the second, third and fourth quarters. Part of that is influenced by our change in our marketing strategies and reallocating some of our marketing spend while reducing it at the same time, as well as then some additional cost structure changes that we've enacted early in the second quarter or late in the first. And we'll start -- you'll start to see the benefit of that flow through here when we report our second quarter earnings.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Ms. Joan Walter for closing remarks.

We'd like to thank everyone for your questions today and remind you that our next results call is scheduled for February 6 when we'll announce our fiscal 2018 second quarter results. Thank you for your continued support of Adtalem.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.